Powell Indicates Fed May Slow Pace of Rate Hikes Next Week

Federal Reserve Chairman Jerome Powell said that the central bank may slow its aggressive interest rate hiking at next week’s Fed meeting.

Powell said in an appearance at the Brookings Institution in Washington that while he thinks the Fed will need to continue raising rates, it may ease off the gas a bit to gauge the lagged effects of the rate hikes on the economy.

“The full effects of our rapid tightening so far are yet to be felt,” Powell said. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”

“The time for moderating the pace of rate increases may come as soon as the December meeting,” he added. Stocks rose in response to his remarks.

JOB OPENINGS EDGED DOWN IN OCTOBER AS FED HIKED INTEREST RATES

Still, while Powell noted that there is “considerable uncertainty” about what rate will be sufficiently restrictive to return inflation to the Fed’s 2% level, the chairman did emphasize that officials don’t want to scale down the rate hikes quickly given the unexpected stickiness of inflation throughout the past year.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy,” Powell said.

Earlier this month, the central bank conducted another huge three-quarters-of-a-percentage-point, or 75 basis points, rate increase. It was the fourth such increase in just five months — the largest hike in four decades. Since the start of the year, the Fed has ratcheted up the rate by a whopping 375 basis points.

With Powell’s comments Wednesday, it is becoming increasingly clear that the Fed will likely hike rates by a reduced 50 basis points following next week’s highly anticipated Federal Open Market Committee meeting.

Investors are now pegging the odds of a 50 basis point hike at 77% and pricing in less than a 25% chance of a 75 basis point hike, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices. Just a day ago, the odds of a 50 basis point increase were at about 66%, and a month ago, there were nearly even odds of either a 75 or 50 basis point hike.

As Powell spoke, the stock market also lurched upward. The Dow Jones Industrial Average immediately notched a gain of 350 points, growing by 1%, while the tech-heavy Nasdaq composite gained more than 3%, and the S&P 500 approached a 2% increase.

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The October consumer price index report found that inflation was 7.7% in the 12 months ending in October. The rate came in better than expected and is a figure that committee members will surely factor in when deciding whether to ease the pace of tightening with a 50 basis point increase.